CAPITAL BUDGETING OF RISKY PROJECTS WITH "IMPERFECT" MARKETS FOR PHYSICAL CAPITAL.

Selecting the best from among competing investment proposals is the most important financial decision problem faced by the managers of enterprises. It confronts every high-ranking decision-maker regardless of the nature of his organization's activity. Corporate executive, public official and university administrator alike must determine, with limited information, how much to invest in a variety of risky projects. Managers have been making these decisions since an overfed Australopithicus Robinson Crusoe decided to save a bone for a weapon rather than crack it for its marrow, but there still exists no fully-accepted objective procedure for optimal investment choice, even on a theoretical level where all problems of measurement are neglected. We believe, however, that the direction of research is dear and that a rapid rate of convergence toward an accepted capital budgeting procedure will soon become apparent. Our paper is intended as a single step (in the right direction). We have not solved the problem completely but we hope to have (a) clarified the remaining unsolved theoretical issues and (b) pointed the way toward practical interim techniques which approximate the exact procedures that will be found someday. [ABSTRACT FROM AUTHOR]